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DERIVATIVE FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
 
Types of Derivative Instruments and Derivative Strategies
 
The Company utilizes a risk management strategy that incorporates the use of derivative financial instruments to reduce exposure to certain risks, including but not limited to, interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk. These strategies are developed through the Company's analysis of data from financial simulation models and other internal and industry sources, and are then incorporated into the Company's risk management program.

Derivative instruments expose the Company to credit and market risk and could result in material changes from period to period. The Company attempts to minimize its credit risk by entering into transactions with highly rated counterparties. The Company manages the market risk by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. The Company monitors its use of derivatives in connection with its overall asset/liability management programs and risk management strategies. In addition, all derivative programs are monitored by our risk management department.
 
Derivatives Related to Interest Rate Risk Management
 
Derivative instruments that are used as part of the Company's interest rate risk management strategy include interest rate swaps, interest rate futures, interest rate caps, and interest rate swaptions. The Company's inflation risk management strategy involves the use of swaps that requires the Company to pay a fixed rate and receive a floating rate that is based on changes in the Consumer Price Index ("CPI").
 
Derivatives Related to Risk Mitigation of Certain Annuity Contracts
 
The Company may use the following types of derivative contracts to mitigate its exposure to certain guaranteed benefits related to VA contracts and fixed indexed annuities:
 
•
Foreign Currency Futures
•
Variance Swaps
•
Interest Rate Futures
•
Equity Options
•
Equity Futures
•
Credit Derivatives
•
Interest Rate Swaps
•
Interest Rate Swaptions
•
Volatility Futures
•
Volatility Options
•
Funds Withheld Agreement
•
Total Return Swaps
 
Other Derivatives
 
The Company and certain of its subsidiaries have derivatives with PLC. These derivatives consist of an interest support agreement, a YRT premium support agreement, and portfolio maintenance agreements with PLC.
 
The Company has a funds withheld account that consists of various derivative instruments held by us that is used to hedge the GMWB and GMDB riders. The economic performance of derivatives in the funds withheld account is ceded to Shades Creek. The funds withheld account is accounted for as a derivative financial instrument.
 
Accounting for Derivative Instruments
 
The Company records its derivative financial instruments in the consolidated balance sheet in "other long-term investments" and "other liabilities" in accordance with GAAP, which requires that all derivative instruments be recognized in the balance sheet at fair value. The change in the fair value of derivative financial instruments is reported either in the statement of income or in other comprehensive income (loss), depending upon whether it qualified for and also has been properly identified as being part of a hedging relationship, and also on the type of hedging relationship that exists.
For a derivative financial instrument to be accounted for as an accounting hedge, it must be identified and documented as such on the date of designation. For cash flow hedges, the effective portion of their realized gain or loss is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged item impacts earnings. Any remaining gain or loss, the ineffective portion, is recognized in current earnings. For fair value hedge derivatives, their gain or loss as well as the offsetting loss or gain attributable to the hedged risk of the hedged item is recognized in current earnings. Effectiveness of the Company's hedge relationships is assessed on a quarterly basis.
The Company reports changes in fair values of derivatives that are not part of a qualifying hedge relationship through earnings in the period of change. Changes in the fair value of derivatives that are recognized in current earnings are reported in "Realized investment gains (losses)—Derivative financial instruments".
 
Derivative Instruments Designated and Qualifying as Hedging Instruments
 
Cash-Flow Hedges
 
•
In connection with the issuance of inflation-adjusted funding agreements, the Company has entered into swaps to essentially convert the floating CPI-linked interest rate on these agreements to a fixed rate. The Company pays a fixed rate on the swap and receives a floating rate primarily determined by the period’s change in the CPI. The amounts that are received on the swaps are almost equal to the amounts that are paid on the agreements. None of these positions were held as of December 31, 2015 (Successor Company), as these funding agreements and correlating swaps matured in June 2015.
 
Derivative Instruments Not Designated and Not Qualifying as Hedging Instruments
 
The Company uses various other derivative instruments for risk management purposes that do not qualify for hedge accounting treatment. Changes in the fair value of these derivatives are recognized in earnings during the period of change.

Derivatives Related to Variable Annuity Contracts
 
•
The Company uses equity, interest rate, currency, and volatility futures to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within its VA products. In general, the cost of such benefits varies with the level of equity and interest rate markets, foreign currency levels, and overall volatility.

•
The Company uses equity options, variance swaps, and volatility options to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within its VA products. In general, the cost of such benefits varies with the level of equity markets and overall volatility.

•
The Company uses interest rate swaps and interest rate swaptions to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within its VA products.

•
The Company markets certain VA products with a GMWB rider. The GMWB component is considered an embedded derivative, not considered to be clearly and closely related to the host contract.

•
The Company has a funds withheld account that consists of various derivative instruments held by the Company that are used to hedge the GMWB and GMDB riders. The economic performance of derivatives in the funds withheld account is ceded to Shades Creek. The funds withheld account is accounted for as a derivative financial instrument.
 
Derivatives Related to Fixed Annuity Contracts
 
•
The Company uses equity, futures, and options to mitigate the risk within its fixed indexed annuity products. In general, the cost of such benefits varies with the level of equity and overall volatility.

•
The Company uses equity options to mitigate the risk within its fixed indexed annuity products. In general, the cost of such benefits varies with the level of equity markets.

•
The Company markets certain fixed indexed annuity products. The FIA component is considered an embedded derivative, not considered to be clearly and closely related to the host contract.
 
Derivatives Related to Indexed Universal Life Contracts
 
•
The Company uses equity, futures, and options to mitigate the risk within its indexed universal life products. In general, the cost of such benefits varies with the level of equity markets.

•
The Company markets certain IUL products. The IUL component is considered an embedded derivative, not considered to be clearly and closely related to the host contract.
 
Other Derivatives
 
•
The Company uses certain interest rate swaps to mitigate the price volatility of fixed maturities. None of these positions were held as of December 31, 2015 (Successor Company).

•
The Company and certain of its subsidiaries have an interest support agreement, YRT premium support agreement, and two portfolio maintenance agreements with PLC.

•
The Company uses various swaps and other types of derivatives to manage risk related to other exposures.

•
The Company is involved in various modified coinsurance which contain embedded derivatives. Changes in their fair value are recorded in current period earnings. The investment portfolios that support the related modified coinsurance reserves had fair value changes which substantially offset the gains or losses on these embedded derivatives.
 
The following table sets forth realized investments gains and losses for the periods shown:
 
Realized investment gains (losses) - derivative financial instruments
 
 
Successor Company
 
Predecessor Company
 
February 1, 2015
to
December 31, 2015
 
January 1, 2015
to
January 31, 2015
 
For The Year Ended December 31,
 
 
 
2014
 
2013
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Derivatives related to variable annuity contracts:
 

 
 
 
 

 
 

Interest rate futures - VA
$
(14,818
)
 
$
1,413

 
$
27,801

 
$
(31,216
)
Equity futures - VA
(5,033
)
 
9,221

 
(26,104
)
 
(52,640
)
Currency futures - VA
7,169

 
7,778

 
14,433

 
(469
)
Variance swaps - VA
—

 
—

 
(744
)
 
(11,310
)
Equity options - VA
(27,733
)
 
3,047

 
(41,216
)
 
(95,022
)
Volatility options - VA
—

 
—

 
—

 
(115
)
Interest rate swaptions - VA
(13,354
)
 
9,268

 
(22,280
)
 
1,575

Interest rate swaps - VA
(85,942
)
 
122,710

 
214,164

 
(157,408
)
Embedded derivative - GMWB
6,512

 
(68,503
)
 
(119,844
)
 
162,737

Funds withheld derivative
30,117

 
(9,073
)
 
47,792

 
71,862

Total derivatives related to VA contracts
(103,082
)
 
75,861

 
94,002

 
(112,006
)
Derivatives related to FIA contracts:
 

 
 

 
 

 
 

Embedded derivative - FIA
(738
)
 
1,769

 
(16,932
)
 
(942
)
Equity futures - FIA
(355
)
 
(184
)
 
870

 
173

Volatility futures - FIA
5

 
—

 
20

 
(5
)
Equity options - FIA
1,211

 
(2,617
)
 
9,906

 
1,866

Total derivatives related to FIA contracts
123

 
(1,032
)
 
(6,136
)
 
1,092

Derivatives related to IUL contracts:
 

 
 

 
 

 
 

Embedded derivative - IUL
(614
)
 
(486
)
 
(8
)
 
—

Equity futures - IUL
144

 
3

 
15

 
—

Equity options - IUL
(540
)
 
(115
)
 
150

 
—

Total derivatives related to IUL contracts
(1,010
)
 
(598
)
 
157

 
—

Embedded derivative - Modco reinsurance treaties
166,092

 
(68,026
)
 
(105,276
)
 
205,176

Interest rate swaps
—

 
—

 
—

 
2,985

Derivatives with PLC(1)
(3,778
)
 
15,863

 
4,085

 
(15,072
)
Other derivatives
91

 
(37
)
 
(324
)
 
(14
)
Total realized gains (losses) - derivatives
$
58,436

 
$
22,031


$
(13,492
)

$
82,161


(1)These derivatives include an interest support, YRT premium support, and portfolio maintenance agreements between certain of the Company’s subsidiaries and PLC.

The following table sets forth realized investments gains and losses for the Modco trading portfolio that is included in realized investment gains (losses) — all other investments:
 
Realized investment gains (losses) - all other investments
 
Successor Company
 
Predecessor Company
 
February 1, 2015
to
December 31, 2015
 
January 1, 2015
to
January 31, 2015
 
For The Year Ended December 31,
 
 
 
2014
 
2013
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Modco trading portfolio(1)
$
(167,359
)
 
$
73,062

 
$
142,016

 
$
(178,134
)

(1)The Company elected to include the use of alternate disclosures for trading activities.

The following tables present the components of the gain or loss on derivatives that qualify as a cash flow hedging relationship:
 
Gain (Loss) on Derivatives in Cash Flow Relationship
 
 
Amount of Gains (Losses) Deferred in Accumulated Other Comprehensive Income (Loss) on Derivatives
 
Amount and Location of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Loss)
 
Amount and Location of (Losses) Recognized in Income (Loss) on Derivatives
 
 
(Effective Portion)
 
(Ineffective Portion)
 
 
Benefits and settlement
 expenses
 
Realized investment
gains (losses)
 
(Effective Portion)
 
 
 
(Dollars In Thousands)
Successor Company
 
 
 
 
 
February 1, 2015 to December 31, 2015
 
 
 
 
 
Inflation
$
(131
)
 
$
(131
)
 
$
73

Total
$
(131
)
 
$
(131
)
 
$
73

 
 
 
 
 
 
 
 
 
 
 
 
Predecessor Company
 
 
 
 
 
January 1, 2015 to January 31, 2015
 

 
 

 
 

Inflation
$
13

 
$
(36
)
 
$
(7
)
Total
$
13

 
$
(36
)
 
$
(7
)
 
 
 
 
 
 
Predecessor Company
 
 
 
 
 
For The Year Ended December 31, 2014
 

 
 

 
 

Inflation
$
(4
)
 
$
(1,777
)
 
$
(223
)
Total
$
(4
)
 
$
(1,777
)
 
$
(223
)
 
 
 
 
 
 
Predecessor Company
 
 
 
 
 
For The Year Ended December 31, 2013
 

 
 

 
 

Inflation
$
1,130

 
$
(2,349
)
 
$
(190
)
Total
$
1,130

 
$
(2,349
)
 
$
(190
)


The table below presents information about the nature and accounting treatment of the Company’s primary derivative financial instruments and the location in and effect on the consolidated financial statements for the periods presented below:
 
Successor Company
 
Predecessor Company
 
As of December 31, 2015
 
As of December 31, 2014
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Other long-term investments
 

 
 

 
 

 
 

Derivatives not designated as hedging instruments:
 

 
 

 
 

 
 

Interest rate swaps
$
1,435,000

 
$
66,408

 
$
1,550,000

 
$
50,743

Derivatives with PLC(1)
1,619,200

 
18,161

 
1,497,010

 
6,077

Embedded derivative - Modco reinsurance treaties
64,593

 
1,215

 
25,760

 
1,051

Embedded derivative - GMWB
1,723,081

 
49,007

 
1,302,895

 
37,497

Interest rate futures
282,373

 
1,537

 
27,977

 
938

Equity futures
262,485

 
1,275

 
26,483

 
427

Currency futures
226,936

 
2,499

 
197,648

 
2,384

Equity options
2,198,340

 
179,458

 
1,921,167

 
163,212

Interest rate swaptions
225,000

 
3,663

 
625,000

 
8,012

Other
242

 
347

 
242

 
360

 
$
8,037,250

 
$
323,570

 
$
7,174,182

 
$
270,701

Other liabilities
 

 
 

 
 

 
 

Cash flow hedges:
 

 
 

 
 

 
 

Inflation
$
—

 
$
—

 
$
40,469

 
$
142

Derivatives not designated as hedging instruments:
 

 
 

 
 

 
 

Interest rate swaps
475,000

 
16,579

 
275,000

 
3,599

Embedded derivative - Modco reinsurance treaties
2,473,427

 
178,362

 
2,562,848

 
311,727

Funds withheld derivative
1,149,664

 
102,378

 
1,233,424

 
57,305

Embedded derivative - GMWB
1,834,308

 
67,528

 
1,702,899

 
63,460

Embedded derivative - FIA
1,110,790

 
100,329

 
749,933

 
124,465

Embedded derivative - IUL
57,760

 
29,629

 
12,019

 
6,691

Interest rate futures
793,763

 
1,539

 
—

 
—

Equity futures
233,412

 
2,599

 
385,256

 
15,069

Currency futures
46,692

 
1,115

 
—

 
—

Equity options
1,205,204

 
22,167

 
699,295

 
47,077

 
$
9,380,020

 
$
522,225

 
$
7,661,143

 
$
629,535

(1)These derivatives include an interest support, YRT premium support, and portfolio maintenance agreements between certain of the Company’s subsidiaries and PLC.
 
The Company reclassified the remaining balance of its cash flow hedge derivative financial instruments out of accumulated other comprehensive income (loss) into earnings during the period of February 1, 2015 to December 31, 2015 (Successor Company) as these derivative financial instruments matured in June of 2015.